What to look for in a debt fund investment?

For investors, the debt fund investment is a happy hunting ground as it can add value to their overall portfolio. For different investment needs, debt mutual funds offer great solutions and tax advantage that old banking products do not offer. However, majority of the investors in India still go for the fixed schemes over debt funds. The reason is a lack of awareness on these funds and preference to traditional investment methods for assured returns.

 

The market has large stock of debt fund offerings which cater to a variety of risk portfolio, investment horizon, income, and capital growth needs. The debt funds come with various risks including credit risk and liquidity risk but investors can limit the impact by buying funds only from reputed fund houses with good record of managing debt investments. There are various categories of debt funds available for investors including gilt funds, income funds,short term debt funds, credit opportunities funds, fixed maturity plans, and dynamic bond funds.

 

The main goal of a debt fundsis to offer investors a steady income after the maturity period. Therefore, to get the maximum benefit out of these funds, they should decide a time horizon that they want to stay invested in. However, choosing a debt fund investment might become a complicated task as understanding and tracking of interest rate movements and credit risks are difficult even for the experienced investors. Therefore, investors should always consult with their financial advisors to know which debt fund is suitable for their investment portfolio.

 

Here are some points to look in a debt fund investment:

Average Maturity: A debt fund portfolio includes several bonds with variable maturity dates. The debt funds are categorized in different categories based on the average maturity of the bonds the fund houses plan to invest in. Average maturity is the weighted average of maturity for all bonds in the fund portfolio. Therefore, it is advisable to match your own holding period with the fund’s maturity profile while buying a debt fund.

Risk Tolerance:While the returns in debt fund category are high, the risk is equally high too. Investors in can choose to invest in various instruments such as risk-free government securities as well as high-risk corporate bonds. Therefore, it is vital to understand how much of credit risk a fund has assumed to make its returns. Each instrument is assigned a credit rating; so higher the rating, safer the investment.

Performance:  If a fund is leading in one, three or five year categories; it still does not guarantee to be a potential debt fund with good returns. Therefore to assess its performance, investors should always compare a debt fund’s track record based on two complete interest rate cycles. Apart from that, investors can take stock of its best and worst one-year performance in the last eight to ten years to assess both the track record along with risk profile.

 

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